Big partner’s capital injection : QA in business administration “Improve the profitability before seeking more capital”

This time, Inamori* spoke about the above motto in his book : Practical Accounting -Business Administration and Accounting -.

What Inamori said is quoted with “”.

“Question: The performance of our hotel business has not been so good. Is it good to revamp it by bringing more capital from big name players, even if we must hand over some ownership to redevelop our hotel?”

“Answer: Improve profitability before bringing new capital. Expansion without improving profitability looks too risky. The cost structure must have rooms to be improved.”

Here, Mr. Inamori fundamentally analyzed the issues and stressed how important it is for the top leader to understand the status quo of the hotel and underlying issues. He also explained why we must take them into account by stressing the following points.

Let me explain one by one.

1. Fully understand the status quo

“Frankly speaking, it looks rather unrealistic to bring new capital to boost your business while keeping full control of it. I feel my comments sound harsh to you. By analyzing the financial statement of your company, I found that sales have increased slightly, but operating income has not increased at all. Due to the large interest payment, ordinary income has been eroded. On the other hand, depreciation has increased and accumulated every year. I assume the depreciation must have brought you some free cash flow, but given the increased interest payment comes from debt, your cost structure consumed that incurred free cash flow and much worse, you increased the debt to make ends meet. Therefore, you must seriously think of improving your cost structure at least to create some reserves that come from the depreciation.”

→Taiwan’s TSMC seems to generate a profit margin of over 50%. I believe that efforts were probably made from the early stage of the company’s growth. As for our company, we have not been able to maintain the profit margin that we achieved in the past. I think I need to look into our cost structure and modify it to produce more profits.

2. Analyze your subliminal mind

“ As the saying goes ’God helps those who help themselves’, I would like you to have such an attitude. Funny enough but banks never provide finance to those who can’t stand by themselves. You must create umbrellas by yourself for rainy days to borrow more umbrellas from the bank. You intend to have more capital injection from the big-name player but in reality, the bank would ask you for a guarantee from the capital partner. The reality is, despite your slight sales improvement, your profitability never improved. Based on this cost structure, new capital injection never revamps your deteriorated performance. In any case, you need to improve your cost structure by yourself, it looks like there is no other way for you to survive.”

→ Both Mr. Inamori and Konosuke Matsushita say the importance of desire.  Although the top leader who raised this question did not imply, I think he must have given up striving himself. If you don’t have the mindset to improve your bottom line and commit yourself to creating a profitable cost structure,  I think it will be difficult to actually revamp the financial status. I also must ask myself if my desire is strong enough or not.

3. Anticipate how investors react

“If you borrow money from a bank for a large capital investment that occurs once every 30 years, obviously, the bank will ask for a guarantee from a major capital partner. Capital partners naturally ask for a reasonable return against their investment, they certainly ask for 100% ownership. No one can expect a free lunch.”

→A top leader of another hotel management company said when he purchased all the stocks of the company with large amounts of personal debts, his commitment and involvement have largely changed since he was simply the appointed CEO. I think he was also able to understand the mindset of investors, and this brought different views of financial aspects of the company. When thinking of capital injecting from the big player, we must  understand their mindset.

Further queries or doubts, please email to ytomizuka@abrilsjp.com

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